RBI likely to cut rate on August 2 as inflation hits record low

Encouraged by significant price improvement, bankers expect RBI, which has kept rates on hold at 6.25% for the fourth straight time citing risk to inflation, to change its monetary stance and may even go for an aggressive rate cut.
The Reserve Bank of India seal is pictured on a gate outside the RBI headquarters in Mumbai.(Reuters)With retail inflation receding to record low levels, the Reserve Bank is likely to cut the benchmark lending rate by at least 0.25% in its third bi-monthly monetary policy review on Wednesday, say experts and bankers.Encouraged by significant price improvement, bankers expect RBI, which has kept rates on hold at 6.25% for the fourth straight time citing risk to inflation, to change its monetary stance and may even go for an aggressive rate cut.“The expectation is of rate cut of a minimum 25 basis points as inflation has eased and also as industrial growth continues to remain weak. A rate cut will give a push to credit growth which has been sluggish from last many quarters,” Bank of Maharashtra Managing Director RP Marathe said.Echoing similar views, Indian Bank Managing Director Kishor Kharat said there is an expectation that there could be 0.25% rate cut by RBI this time.The RBI may not touch Cash Reserve Ratio or Statutory Liquidity Ratio as there is adequate liquidity in the market, Kharat added.The six-member monetary policy committee (MPC) of the RBI headed by RBI Governor Urjit Patel will announce the outcome of the meeting on August 2 afternoon.According to HDFC Bank Managing Director Aditya Puri, there is always a case, but there are a number of members on the committee who will examine it.“Yes, inflation has come down, but will it remain at this level? We all know that given the base effect change, it will go up to some extent. Is there still a case for a decline in interest rates? I think most people think so. What will happen, I do not have a clue,” Puri said.Private sector Kotak Bank is of the opinion that since the RBI has revised down its inflation trajectory sharply in the June policy, and given that inflation reading, the central bank has some room to be accommodative.“We expect the MPC to cut repo rate by 25 basis points in the August meeting,” the bank said in a report.Global Research firm Bank of America Merrill Lynch (BofAML) too expects the MPC to cut rates by 25 basis points (0.25 percentage point).An SBI report said that most inflation risks are now on the downside and expect the retail inflation to be sub-2% for the next month, sub-3% for August-September and sub-4 per cent for October-November and 4-4.5% between December and March.For 2017-18, CPI inflation average could thus be below 3.5% with a downward bias, the report added.The retail inflation, which the RBI mainly factors in while deciding interest rate, has declined to historical low of 1.54% in June. The wholesale price inflation for the month too has dropped to eight month low.Commenting on the retail inflation data, chief economic adviser Arvind Subramanian had said the “paradigm shift” in inflationary process has been missed by all, who have made “systematic inflation forecast error”, apparently referring to the RBI.In the MPC, RBI Governor Urjit Patel had argued for avoiding “premature policy action” and waiting for more inflation data.“Incoming data is expected to provide greater clarity on the durability of recent food and non-food disinflation,” he had opined.One of the MPC members, Ravindra Dholakia, however, had advocated a 50 basis point cut in the repo rate, saying several noteworthy developments recently on prices and output fronts warrant a decisive policy action.As always, India Inc has been pitching for the rate cut to stimulate growth.Citing inflation at a five-year low and deceleration in factory output, Assocham has written to RBI Governor Urjit Patel for at least 25 basis points cut in the policy interest rate.“The deceleration in factory output growth could further bolster the case for a rate cut next month to boost Asia’s third-largest economy, which grew 6.1% in the January-March quarter -- its weakest pace in more than two years,” it said.However, factory output slumped to 1.7% in May, from 8% a year ago due to poor performance of mining and manufacturing.